Market Structure and Exchange Rate Pass-Through

53 Pages Posted: 12 May 2015

See all articles by Raphael Auer

Raphael Auer

Swiss National Bank; Bank for International Settlements (BIS)

Raphael Schoenle

Brandeis University

Date Written: May 2015

Abstract

We study firm-level pricing behavior through the lens of exchange rate pass-through and provide new evidence on how firm-level market shares and price complementarities affect pass-through decisions. Using micro-data from U.S. import prices, we identify two facts: First, exactly the firms that react the most with their prices to changes in their own costs are also the ones that react the least to changing competitor prices. Second, the response of import Prices to exchange rate changes is U-shaped in market share while it is hump-shaped in response to competitor prices. We show that both facts are consistent with a model based on Dornbusch (1987) that generates variable markups through a nested-CES demand system. Finally, based on the model, we find that direct cost pass-through and price complementarities play approximately equally important roles in determining pass-through but also partly offset each other. This suggests that equilibrium feedback effects in pricing are large. Omission of either channel in an empirical analysis results in a failure to explain how market structure affects price-setting in industry equilibrium.

Keywords: exchange rate pass-through, price complementarities, price setting, U.S. import prices

JEL Classification: E3, E31, F41

Suggested Citation

Auer, Raphael and Schoenle, Raphael, Market Structure and Exchange Rate Pass-Through (May 2015). CEPR Discussion Paper No. DP10585, Available at SSRN: https://ssrn.com/abstract=2605020

Raphael Auer (Contact Author)

Swiss National Bank ( email )

Fraumuensterstr. 8
Zurich, 8022
Switzerland

Bank for International Settlements (BIS)

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Raphael Schoenle

Brandeis University ( email )

Waltham, MA 02454
United States

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